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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from/to
NB&T FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Ohio 31-1004998
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
48 N. South Street, Wilmington, Ohio 45177
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (513) 382-1441
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date: As of April 25, 2003, 3,243,432
common shares were issued and outstanding.
1
NB&T FINANCIAL GROUP, INC.
March 31, 2003 FORM 10-Q
Table of Contents
Page
----
PART I
Item 1: Financial Statements 3
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Independent Accountants' Report 10
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3: Quantitative and Qualitative Disclosures about
Market Risk 14
Item 4: Controls and Procedures 15
Part II
Item 1: Legal Proceedings 16
Item 2: Changes in Securities and Use of Proceeds 16
Item 3: Defaults Upon Senior Securities 16
Item 4: Submission of Matters to a Vote of Security Holders 16
Item 5: Other Information 16
Item 6: Exhibits and Reports on Form 8-K 17
Signatures 18
Certifications 19
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS:
NB&T FINANCIAL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
(Dollars in thousands) 2003 2002
- ------------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Cash and due from banks $ 19,282 $ 18,812
Interest-bearing demand deposits 343 10
Federal funds sold 8,454 6,988
---------------- ----------------
Cash and cash equivalents 28,079 25,810
---------------- ----------------
Securities - available-for-sale 202,714 168,600
Securities - held-to-maturity 41,327 44,490
Loans, net of allowance for loan losses of $4,123 and $4,010 388,242 380,661
Premises and equipment 14,710 14,832
Federal Reserve and Federal Home Loan Bank stock 7,665 7,598
Goodwill and other intangibles 7,410 7,584
Interest receivable and other assets 16,199 15,228
---------------- ----------------
Total assets $ 706,346 $ 664,803
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand $ 52,052 $ 52,273
Savings, NOW and Money Market 226,510 208,221
Time 208,378 207,595
---------------- ----------------
Total deposits 486,940 468,089
---------------- ----------------
Short-term borrowings 21,645 19,240
Long-term debt 135,857 116,446
Interest payable and other liabilities 3,988 3,724
---------------- ----------------
Total liabilities 648,430 607,499
---------------- ----------------
COMMITMENTS AND CONTINGENCIES
Equity From ESOP Shares 12,642 12,511
---------------- ----------------
STOCKHOLDERS' EQUITY
Preferred stock, no par value, authorized 100,000 shares; none issued
Common stock, no par value; authorized 6,000,000 shares; issued -
3,818,950 shares 1,000 1,000
Additional paid-in capital 9,386 9,270
Retained earnings 40,033 39,281
Unearned employee stock ownership plan (ESOP) shares (1,676) (1,703)
Accumulated other comprehensive income 1,471 2,064
Treasury stock; 575,518 and 596,418 shares at cost in 2003 and 2002 (4,940) (5,119)
---------------- ----------------
Total stockholders' equity 45,274 44,793
---------------- ----------------
Total liabilities and stockholders' equity $ 706,346 $ 664,803
================ ================
See Notes to Condensed Consolidated Financial Statements 3
NB&T FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31,
------------------------------------
(Dollars in thousands, except per share amounts) 2003 2002
- ------------------------------------------------------------------------------------------------------
(Unaudited)
INTEREST AND DIVIDEND INCOME
Loans $ 6,807 $ 7,438
Securities-Taxable 1,701 2,181
Securities-Tax-exempt 667 678
Federal funds sold and other 32 71
Dividends on Federal Home Loan and Federal Reserve
Bank stock 78 78
---------------- ----------------
Total interest and dividend income 9,285 10,446
---------------- ----------------
INTEREST EXPENSE
Deposits 2,068 3,270
Short-term borrowings 53 94
Long-term debt 1,526 1,421
---------------- ----------------
Total interest expense 3,647 4,785
---------------- ----------------
Net Interest Income 5,638 5,661
Provision for Loan Losses 540 375
---------------- ----------------
Net Interest Income After Provision for Loan Losses 5,098 5,286
---------------- ----------------
NON-INTEREST INCOME
Trust income 194 233
Service charges and fees 767 631
ATM network fees 113 165
Insurance agency commissions 651 516
Net gains on sales of securities available-for-sale 546 -
Other 338 414
---------------- ----------------
Total non-interest income 2,609 1,959
---------------- ----------------
NON-INTEREST EXPENSE
Salaries and employee benefits 3,056 2,653
Net occupancy expense 346 303
Equipment and data processing expense 705 773
Professional fees 363 308
Marketing expense 159 158
State franchise tax 178 144
Amortization of intangibles 174 143
Other 740 806
---------------- ----------------
Total non-interest expense 5,721 5,288
---------------- ----------------
Income Before Income Tax 1,986 1,957
Provision for Income Taxes 349 418
Net Income $ 1,637 $ 1,539
================ ================
Basic Earnings Per Share $ .52 $ .50
================ ================
Diluted Earnings Per Share $ .52 $ .49
================ ================
Dividends Declared Per Share $ .24 $ .23
================ ================
See Notes to Condensed Consolidated Financial Statements 4
NB&T FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
------------------------------------
(Dollars in thousands) 2003 2002
- ----------------------------------------------------------------------------------------------------
(Unaudited)
OPERATING ACTIVITIES
Net income $ 1,637 $ 1,539
Items not requiring (providing) cash
Depreciation and amortization 611 469
Provision for loan losses 540 375
Amortization of premiums and discounts on
securities 395 148
Net realized (gains) losses on
available-for-sale securities (546) -0-
FHLB stock dividends (67) (73)
Net change in:
Loans held for sale -0- (3,197)
Other assets and liabilities (332) 196
---------------- ----------------
Net cash provided by (used in) operating
activities 2,238 (543)
---------------- ----------------
INVESTING ACTIVITIES
Purchases of available-for-sale securities (92,104) (50,174)
Proceeds from sales of available-for-sale
securities 18,921 -0-
Proceeds from maturities of available-for-sale
securities 38,314 39,534
Proceeds from maturities of held-to-maturity
securities 3,169 -0-
Net change in loans (8,121) 3,794
Purchase of premises and equipment (375) (821)
Proceeds from sales of premises and equipment 56 -0-
---------------- ----------------
Net cash (used in) investing activities (40,140) (7,667)
---------------- ----------------
FINANCING ACTIVITIES
Net change in:
Deposits 18,851 15,290
Short-term borrowings 2,405 616
Proceeds from FHLB advances 20,000 -0-
Repayment of FHLB advances (589) (374)
Cash dividends (778) (738)
Proceeds from exercise of stock options 282 -0-
---------------- ----------------
Net cash provided by financing activities 40,171 14,794
---------------- ----------------
Increase in Cash and Cash Equivalents 2,269 6,584
Cash and Cash Equivalents, Beginning of Year 25,810 28,437
---------------- ----------------
Cash and Cash Equivalents, End of Period $ 28,079 $ 35,021
================ ================
See Notes to Condensed Consolidated Financial Statements 5
NB&T FINANCIAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and the instructions to Form 10-Q.
The Form 10-Q does not include all the information and footnotes required by
accounting principles generally accepted in the United States of America for
complete financial statements. Only material changes in financial condition and
results of operations are discussed in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
The consolidated balance sheet as of December 31, 2002 has been derived from the
audited consolidated balance sheet of that date.
In the opinion of management, the condensed consolidated financial statements
contain all adjustments necessary to present fairly the financial condition of
NB&T Financial Group, Inc. as of March 31, 2003, and December 31, 2002, and the
results of its operations and cash flows for the three months ended March 31,
2003 and 2002. The results of operations for the interim periods reported herein
are not necessarily indicative of results of operation to be expected for the
entire year. The unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements, accounting
policies and financial notes thereto included in the Company's Annual Report and
Form 10-K for the year ended December 31, 2002 filed with the Commission.
NOTE 2: SECURITIES
The amortized cost and approximate fair values of securities are as follows
(thousands):
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
------------------------------------------------------------------
March 31, 2003:
Available-for-Sale Securities:
U.S. government agencies $ 58,274 $ 314 $ 42 $ 58,546
Mortgage-backed securities 125,625 1,706 35 127,296
State and political subdivisions 8,577 270 0 8,847
Other securities 8,010 15 0 8,025
-------------- -------------- -------------- -------------
$ 200,486 $ 2,305 $ 77 $ 202,714
============== ============== ============== =============
Held-to-Maturity Securities:
State and political subdivisions $ 41,327 $ 1,158 $ 79 $ 42,406
============== ============== ============== =============
December 31, 2002:
Available-for-Sale Securities:
U.S. government agencies $ 44,315 $ 339 $ 0 $ 44,654
Mortgage-backed securities 104,572 2,531 3 107,100
State and political subdivisions 8,576 265 0 8,841
Other securities 8,010 8 13 8,005
-------------- -------------- -------------- -------------
$ 165,473 $ 3,143 $ 16 $ 168,600
============== ============== ============== =============
Held-to-Maturity Securities:
State and political subdivisions $ 44,490 $ 1,216 $ 76 $ 45,630
============== ============== ============== =============
6
NB&T FINANCIAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(Unaudited)
NOTE 3: LOANS
Categories of loans include (thousands):
March 31, December 31,
2003 2002
------------------------------------
Commercial and industrial $ 113,196 $ 108,513
Agricultural 19,983 20,857
Real estate construction 10,382 7,282
Commercial real estate 21,665 28,179
Residential real estate 147,234 141,417
Consumer 78,847 74,533
Other 1,472 4,247
---------------- ----------------
Total loans 392,779 385,028
Less
Net deferred loan fees, premiums and discounts (414) (357)
Allowance for loan losses (4,123) (4,010)
---------------- ----------------
Net loans $ 388,242 $ 380,661
================ ================
Activity in the allowance for loan losses was as follows (thousands):
Three Months Ended March 31,
2003 2002
---------------------------------
Balance, beginning of year $ 4,010 $ 3,810
Provision for loan losses 540 375
Recoveries 123 96
Charge-offs (550) (413)
-------------- --------------
Balance, end of period $ 4,123 $ 3,868
============== ==============
Impaired loans totaled $4,725,000 and $4,214,000 at March 31, 2003 and December
31, 2002, respectively. An allowance for loan losses of $1,569,000 and
$1,542,000 relates to impaired loans of $3,990,000 and $4,196,000 at March 31,
2003 and December 31, 2002, respectively. At March 31, 2003 and December 31,
2002, impaired loans of $735,000 and $18,000 had no related allowance for loan
losses.
At March 31, 2003 and December 31, 2002, accruing loans delinquent 90 days or
more totaled $2,162,000 and $1,391,000, respectively. Non-accruing loans at
March 31, 2003 and December 31, 2002 were $6,340,000 and $4,734,000,
respectively.
7
NB&T FINANCIAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(Unaudited)
NOTE 4: COMMITMENTS
Outstanding commitments to extend credit as of March 31, 2003 total $45,702,000.
Standby letters of credit as of March 31, 2003 total $640,000.
NOTE 5: EARNINGS PER SHARE
The factors used in the earnings per share computation were as follows
(thousands, except share and per share amounts):
Three Months Ended March 31,
2003 2002
-----------------------------------
Numerator:
Net income $ 1,637 $ 1,539
================ ================
Denominator:
Weighted-average common shares outstanding (basic) 3,131,135 3,085,730
Effect of stock options 33,908 26,359
---------------- ----------------
Weighted-average common shares outstanding (diluted) 3,165,043 3,112,089
================ ================
Earnings per share:
Basic $ .52 $ .50
================ =================
Diluted $ .52 $ .49
================ =================
For the three months ended March 31, 2003 and 2002, stock options covering
38,389 and 82,200 shares of common stock were not considered in computing
earnings per share as they were antidilutive.
NOTE 6: STOCK OPTIONS
The Company accounts for its stock option plan under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
grant date. The following table illustrates the effect on net income and
earnings per share if the company had applied the fair value provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation (thousands, except per share amounts):
Three Months Ended March 31,
2003 2002
-----------------------------------
Net income, as reported $ 1,637 $ 1,539
Less: Total stock-based employee compensation cost determined
under the fair value based method, net of income taxes (28) (25)
---------------- ----------------
Pro forma net income $ 1,609 $ 1,514
================ ================
Earnings per share:
Basic - as reported $ .52 $ .50
================ ================
Basic - pro forma $ .51 $ .49
================ ================
Diluted - as reported $ .52 $ .49
================ ================
Diluted - pro forma $ .51 $ .49
================ ================
8
NB&T FINANCIAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(Unaudited)
NOTE 7: EFFECT OF RECENT ACCOUNTING STANDARDS
On November 25, 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN No. 45)
which expands on the accounting guidance of Statements No. 5, 57 and 107 and
incorporates without change the provisions of FASB Interpretation No. 34, which
is being superseded.
FIN No. 45, which is applicable to public and non-public entities, will
significantly change current practice in the accounting for, and disclosure of,
guarantees. Each guarantee meeting the characteristics described in FIN No. 45
is to be recognized and initially measured at fair value, which will be a change
from current practice for most entities. In addition, guarantors will be
required to make significant new disclosures, even if the likelihood of the
guarantor making payments under the guarantee is remote, which represents
another change from current general practice.
FIN No. 45's disclosure requirements are effective for financial statements of
interim or annual periods ending after December 15, 2002, while the initial
recognition and initial measurement provisions are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The Company has
changed its method of accounting and financial reporting for standby letters of
credit by adopting the provisions of FIN No. 45 effective January 1, 2003. There
was no material impact of the adoption on the financial statements.
9
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
NB&T Financial Group, Inc.
Wilmington, Ohio
We have reviewed the accompanying condensed consolidated balance sheet of NB&T
Financial Group, Inc. as of March 31, 2003 and the related condensed
consolidated statements of income and cash flows for the three-month periods
ended March 31, 2003 and 2002. These financial statements are the responsibility
of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2002 and the related consolidated statements of income, retained
earnings and cash flows for the year then ended (not presented herein), and in
our report dated February 5, 2003, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 2002 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
BKD, LLP
/s/ BKD, LLP
Cincinnati, Ohio
May 5, 2003
10
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Net income for the first quarter of 2003 was $1.64 million, an increase of
$98,000, or 6.3%, over the first quarter of 2002 net income of $1.54 million.
Net income per share-basic was $.52 for the first quarter of 2003, compared to
$.50 per share for the first quarter of 2002, an increase of 4.0%. Return on
average equity and return on average assets for the first quarter of 2003 were
11.47% and 0.97%, respectively, compared to 12.15% and 0.91% for the same period
in 2002.
Net Interest Income
Net interest income was $5.64 million for the first quarter of 2003, a decrease
of $23,000 compared to the same quarter last year. Interest income totaled $9.29
million for the first quarter of 2003, a decrease of 11.1% from $10.45 million
during the same period last year. Although average loans and securities
outstanding increased 1.01% and 5.32% compared to the prior year, the effect of
the decline in their average yields exceeded the effect of those gains. The
yield on average loans decreased from 7.81% in the first quarter of 2002 to
7.08% in the first quarter of 2003. The tax-equivalent yield on average
securities decreased from 5.71% for the first quarter last year to 4.51% for the
first quarter of this year. A decrease in interest expense of 23.8% to $3.65
million during the first quarter of 2003 from $4.79 million during the same
period last year offset most of the decrease in interest income. Average
interest-bearing liabilities decreased 1.21% from last year to $572.7 million,
and their cost decreased from 3.35% during the first quarter of last year to
2.58% in the first quarter of this year. Tax-equivalent net interest margin
decreased to 3.72% for the first quarter of this year from 3.79% for the first
quarter of last year.
Provision for Loan Losses
The provision for credit losses represents the charge to income necessary to
adjust the allowance for loan losses to an amount that represents management's
assessment of the estimated probable credit losses inherent in the Bank's loan
portfolio at each balance sheet date. The provision for loan losses increased
44% to $540,000 during the first quarter of 2003 from $375,000 during the first
quarter of last year. The higher provision for loan losses in the first quarter
of 2003 was attributable to an increase in net charge-offs and management's
evaluation of the loan portfolio and potential weaknesses of specific loans. Net
charge-offs were $427,000, or 0.44% (annualized), compared to $317,000, or 0.33%
(annualized), for the same period in 2002.
Non-interest Income
Non-interest income, excluding gains on sales of securities, was $2.06 million
for the first quarter of 2003, an increase of 5.3% over the $1.96 million earned
in the first quarter of 2002. Service charges and fees increased 21.6% from the
first quarter last year due to increases in overdraft fees and debit card
revenue. In August 2002, the Company introduced the Overdraft Honor program that
aids customers by paying more and returning fewer overdraft checks. Insurance
agency commissions increased 26.2% due to increased sales and an agency
acquisition in March 2002. These revenue increases were partially offset by
decreases in Trust and ATM network fees. Trust income decreased 16.7% from the
first quarter of last year as a result of market value decreases in the accounts
managed. ATM network fees decreased 31.5% from the first quarter of last year as
a result of fewer units in operation during the first quarter of 2003 compared
to the same period in 2002.
The Company had $546,000 in securities gains in the first quarter of 2003,
resulting from the sale of $18.9 million in mortgage-backed securities.
Non-interest Expense
Non-interest expense was $5.72 million for the first quarter of 2003, an
increase of 8.2% over the $5.29 million for the first quarter of 2002. The
increase occurred primarily due to increases in salaries and benefits expense.
The number of full-time equivalent employees has increased from 260 at March 31,
2002, to 267 at March 31, 2003. In addition, health care expense and retirement
plan expenses, including the 401(k) and employee stock ownership plans, were
higher for the quarter ended March 31, 2003, compared to the same period last
year.
11
Income Taxes
The provision for income taxes for the first quarter of 2003 was $349,000
compared to $418,000 for the same period in 2002. The effective tax rate for the
three months ended March 31, 2003 was 17.6% compared to 21.4% for the same
period in 2002.
FINANCIAL CONDITION
The changes that have occurred in NB&T Financial Group, Inc.'s financial
condition during 2003 are as follows (in thousands):
March 31 December 31
2003 2002 Amount Percent
---------------------------------------------------
Total Assets $ 706,346 $ 664,803 $ 41,543 6.2
Federal Funds Sold 8,454 6,988 1,466 21.0
Loans (a) 392,365 385,028 7,337 1.9
Securities 244,041 213,090 30,951 14.5
Demand deposits 52,052 52,273 -221 NM
Savings, NOW, MMDA deposits 226,510 208,221 18,289 8.8
CD's $100,000 and over 44,687 42,633 2,054 4.8
Other time deposits 163,691 164,962 -1,271 NM
Total deposits 486,940 468,089 18,851 4.0
Short-term borrowing 21,645 19,240 2,405 12.5
Long-term borrowing 135,857 116,446 19,411 16.7
Stockholders Equity (b) 57,916 57,304 612 1.1
(a) Includes loans held for sale
(b) Includes equity for ESOP shares
At March 31, 2003, total assets were $706.3 million, an increase of $41.5
million from December 31, 2002. The increase is primarily attributable to an
increase in the securities portfolio of $30.9 million and the loan portfolio of
$7.3 million. In addition, cash and cash equivalents increased $2.3 million. The
asset growth was funded by a combination of an increase in deposits and Federal
Home Loan Bank advances. Deposits increased $18.9 million, primarily in the
corporate money market accounts. Federal Home Loan Bank advances increased $19.4
million during the quarter to partially fund the increase in the securities
portfolio. Stockholders' equity increased $612,000 during the quarter to $57.9
million due to an increase in retained earnings for the quarter partially offset
by a decrease in other comprehensive income of $593,000 due to a change in
market value of securities available for sale.
Average total assets declined .20% to $684.2 million from the first quarter of
2002. Average total loans increased to $388.6 million, an increase of 1.01% from
the same quarter of last year. The commercial loan average grew $5.4 million, an
increase of 3.2%, and the personal loan average grew $3.2 million, an increase
of 4.3%. Commercial and industrial lending to small to mid-sized companies
continues to be an area of growth for the Company, and the Bank has increased
its efforts to originate automobile loans through its dealer network. Real
estate loans declined $4.4 million, a decrease of 4%, due to increased customer
refinancing. The securities portfolio average has increased $12.0 million from
the first quarter of 2002 to $237.0 million. In the first quarter of 2003, the
Company purchased $30 million in collateralized mortgage obligations leveraged
with $20 million in Federal Home Loan Bank advances.
Average total deposits decreased $12.9 million or 2.6% from the end of the first
quarter of 2002 to $475.2 million. Average small certificates of deposit
decreased $11.8 million or 6.7% as the Company reduced its cost of funds and
customers continued to seek out higher rates of return. Average short-term
borrowings declined $5.3 million or 18.8% from the first quarter of 2002 due to
decreased public fund balances in repurchase agreements. Average Federal Home
Loan Bank borrowings increased $3 million, or 2.6%, due to the Company
leveraging security purchases with an additional $20 million in fixed-rate,
shorter-term advances. Average long-term debt increased $8.1 million from the
first quarter or 2003, primarily due to the issuance of $8.2 million of trust
preferred debt in the second quarter of 2002.
12
ALLOWANCE FOR LOAN LOSSES
The following table is a summary of the Company's loan loss experience for the
three months ended March 31, 2003 and 2002:
Three Months Ended
March 31
----------------------------
2003 2002
----------------------------
Balance at beginning of period $ 4,010 $ 3,810
Charge-offs:
Commercial and industrial (216) (42)
Commercial real estate (46) (1)
Agricultural 0 (3)
Residential real estate (45) (60)
Installment (241) (296)
Other (2) (11)
------------ ------------
Total charge-offs (550) (413)
------------ ------------
Recoveries:
Commercial and industrial 55 9
Commercial real estate - -
Agricultural - -
Residential real estate 3 13
Installment 65 74
Other - -
------------ ------------
Total recoveries 123 96
------------ ------------
Net charge-offs (427) (317)
Acquired in acquisition
Provision for possible loan losses 540 375
------------ ------------
Balance at end of period $ 4,123 $ 3,868
============ ============
The following table sets forth selected information regarding the Company's loan
quality at the dates indicated (in thousands):
March 31 December 31 March 31
2003 2002 2002
-------- ------------ --------
Loans accounted for on non-accrual basis $ 6,340 $ 4,734 $ 4,233
Accruing loans which are past due 90 days 2,162 1,391 1,286
Renegotiated loans 0 0 0
Other real estate owned 178 226 149
-------- ------------ --------
Total non-performing assets $ 8,680 $ 6,351 $ 5,668
======== ============ ========
Ratios:
Allowance to total loans 1.05% 1.04% 1.02%
Net charge-offs to average loans (annualized) .44% 0.49% .33%
Non-performing assets to total loans
and other real estate owned 2.21% 1.65% 1.50%
13
The allowance is maintained to absorb potential losses in the portfolio.
Management's determination of the adequacy of the reserve is based on reviews of
specific loans, loan loss experience, general economic conditions and other
pertinent factors. If, as a result of charge-offs or increases in risk
characteristics of the loan portfolio, the reserve is below the level considered
by management to be adequate to absorb possible future loan losses, the
provision for loan losses is increased. Loans deemed not collectible are charged
off and deducted from the reserve. Recoveries on loans previously charged off
are added to the reserve.
The Company allocates the allowance for loan losses to specifically classified
loans and non-classified loans generally based on three-year net charge-off
history. In assessing the adequacy of the allowance for loan losses, the Company
considers three principal factors: (1) the three-year rolling average charge-off
percentage applied to the current outstanding balance by portfolio type; (2)
specific percentage applied to individual loans estimated by management to have
a potential loss; and (3) estimated losses attributable to economic conditions.
Economic conditions considered include unemployment levels, the condition of the
agricultural business, and other local economic factors.
As of March 31, 2003, there were $4.6 million in eighteen non-accrual small
business relationships. The majority of this amount consisted of three
relationships, one of which is $1.3 million in the nursing home business and has
been making monthly payments since January 2002 following the signing of a
forbearance agreement. The second relationship amounts to $603,000 and is in the
construction business. The customer has signed a forbearance agreement and is
proceeding with an orderly liquidation of collateral that should be adequate to
satisfy the balance owed to the Company. The third relationship amounts to $1.1
million and is in the hotel business.
Non-accrual residential real estate loans consisted of eighteen loans that total
$1.2 million with the largest balance being $185,319. Non-accrual personal loans
consisted of nine loans that total $206,898 and home equity credit lines
consisted of six loans totaling $251,575.
LIQUIDITY AND CAPITAL RESOURCES
Effective liquidity management ensures that the cash flow requirements of
depositors and borrowers, as well as Company cash needs, are met. The Company
manages liquidity on both the asset and liability sides of the balance sheet.
The loan to deposit ratio at March 31, 2003, was 80.6%, compared to 76.6% at the
same date in 2002. Loans to total assets were 55.5% at the end of the first
quarter of 2003, compared to 55.1% at the same time last year. Management
strives to keep this ratio below 70%. Of the total securities portfolio, 83.1%
consists of available-for-sale securities that are readily marketable.
Approximately 82.5% of the available-for-sale portfolio is pledged to secure
public deposits, short-term and long-term borrowings and for other purposes as
required by law. The balance of the available-for-sale securities could be sold
if necessary for liquidity purposes. Also, a stable deposit base, consisting of
92.5% core deposits, makes the Company less susceptible to large fluctuations in
funding needs. The Company has short-term borrowing lines of credit with several
correspondent banks. The Company also has both short- and long-term borrowing
available through the Federal Home Loan Bank (FHLB). The Company has the ability
to obtain deposits in the brokered certificate of deposit market to help provide
liquidity to fund loan growth.
The Federal Reserve Board has adopted risk-based capital guidelines that assign
risk weightings to assets and off-balance sheet items and also define and set
minimum capital requirements (risk-based capital ratios). Bank holding companies
must maintain total risk-based, Tier 1 risk-based and Tier 1 leverage ratios of
8%, 4% and 3%, respectively. At March 31, 2003, NB&T Financial Group, Inc. had a
total risk-based capital ratio of 14.47%, a Tier 1 risk-based capital ratio of
13.50%, and a Tier 1 leverage ratio of 8.46%.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to interest rate risk, exchange rate risk, equity
price risk and commodity price risk. The Company does not maintain a trading
account for any class of financial instrument, and is not currently subject to
foreign currency exchange rate risk, equity price risk or commodity price risk.
The Company's market risk is composed primarily of interest rate risk.
Techniques used to measure interest rate risk include both interest rate gap
management and simulation modeling that measures the effect of rate changes on
net interest income and market value of equity under different rate scenarios.
Currently, the Company is in the process of updating its simulation model as of
March 31, 2003. Based on preliminary information, however, the Company does not
anticipate a significant market risk change from its December 31, 2002 results.
14
ITEM 4. CONTROLS AND PROCEDURES
(a) The Company's principal executive officer and principal financial officer
have concluded, based upon their evaluation of the Company's disclosure controls
and procedures as of a date within 90 days of the filing of this report, that
the Company's disclosure controls and procedures are effective.
(b) There have been no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
15
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Not applicable
Item 2 - Changes in Securities and Use of Proceeds
At the 2003 Annual Meeting of Shareholders of NB&T Financial Group, Inc., the
shareholders adopted the Third Amended and Restated Articles of Incorporation of
NB&T Financial Group, Inc., and the Amended and Restated Code of Regulations of
NB&T Financial Group, Inc. The amendments are generally described in Item 4.
None of such amendments materially affected the rights of the shareholders of
NB&T Financial Group, Inc., as the only material change reflected by the
amendments merely made the Articles consistent with Ohio law already in effect.
The substance and reasons for the amendments are set forth in the definitive
proxy statement filed by NB&T Financial Group, Inc., with the Securities and
Exchange Commission on March 21, 2003.
Item 3 - Defaults Upon Senior Securities
Not applicable
Item 4 - Submission of Matters to a Vote of Security Holders
On April 22, 2003, the Annual Meeting of the shareholders of the Company was
held.
The following members of the Board of Directors of the Company were re-elected
for terms expiring in 2005 by the votes indicated:
For Against Abstain
- -------------------------------------------------------------------
S. Craig Beam 2,802,760 4,152 200
Darleen M. Meyers 2,802,960 3,952 200
Robert A. Raizk 2,803,290 3,622 200
Janet M. Williams 2,803,290 3,622 200
Additionally, the Third Amended and Restated Articles of Incorporation
(including the specific provisions) were adopted in their entirety by the votes
indicated:
Broker
For Against Abstain Non-votes
- -----------------------------------------------------------------------------------------------------------
Third amended and Restated Articles of Incorporation 2,545,629 11,845 3,945 245,593
Provisions expanding indemnification of directors and
officers 2,542,163 16,067 3,189 245,593
Provisions restricting the removal of directors and
eliminating the classification of directors 2,544,521 13,709 3,189 245,593
Provisions changing the timing of submission of
nominations of directors 2,545,356 12,824 3,239 245,593
Technical changes and removal of obsolete provisions 2,552,898 6,190 2,331 245,593
Finally, the Amended and Restated Code of Regulations was adopted by the votes
indicated:
Broker
For Against Abstain Non-votes
- -----------------------------------------------------------------------------------------------------------
Amended and Restated Code of Regulations 2,777,135 25,654 4,223 0
Item 5 - Other Information
Not applicable
16
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
3(i) Third Amended and Restated Articles of Incorporation
3(ii) Amended and Restated Code of Regulations
15 Accountants' acknowledgement.
99 Safe harbor under the Private Securities Litigation Reform
Act of 1995.
99.2 Section 906 certification by CEO.
99.3 Section 906 certification by CFO.
(b) Filings on Form 8-K:
The Company filed a Form 8-K with the Securities and Exchange Commission on
January 23, 2003 regarding a press release announcing the results of operations
for the fourth quarter of 2002.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NB&T FINANCIAL GROUP, INC.
Date: May 13, 2003 /s/ Craig F. Fortin
-------------------------------
Craig F. Fortin
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
18
CERTIFICATIONS
I, Timothy L. Smith, the President and Chief Executive Officer of NB&T Financial
Group, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of NB&T Financial Group,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003 /s/ Timothy L. Smith
--------------------
Timothy L. Smith
19
I, Craig F. Fortin, the Senior Vice President and Chief Financial Officer of
NB&T Financial Group, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of NB&T Financial Group,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003 /s/ Craig F. Fortin
-------------------
Craig F. Fortin
20
INDEX TO EXHIBITS
3(i) Third Amended and Restated Articles of Incorporated by reference to Definitive Proxy
Incorporation Statement filed on March 21, 2003, Exhibit A
3(ii) Amended and Restated Code of Regulations Incorporated by reference to Definitive Proxy
Statement filed on March 21, 2003, Exhibit B
15 Accountants' acknowledgement.
99 Safe harbor under the Private Securities
Litigation Reform Act of 1995.
99.2 Section 906 certification by CEO.
99.3 Section 906 certification by CFO.
21